Amazon Is Taking Over the World… of Streaming Video

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As I've started to detail in a recent series of blog posts, Amazon.com (NASDAQ: AMZN) is much more than a dominant online retailer of books and electronics.  The most recent installment in this series captured how Amazon.com is ready to take advantage of the growing (and fragmented) world of selling pet supplies. To highlight just how diverse Amazon.com is, today's post jumps to an entirely different business and takes a more detailed look at what Amazon.com is doing in the realm of streaming video.

Two Models for Streaming Video

Today, streaming video is primarily dominated by two business models.  First, the all-you-can-eat, unlimited viewing for a flat monthly rate that has been made popular by Netflix (NASDAQ: NFLX).  For $8 per month, you can view any movie or TV episode in Netflix's content library of thousands of titles on a wide array of smart TVs, blu-ray players, tablets, smart phones, gaming devices, and more.  With Netflix, there is always something to watch, but it likely isn't the exact movie you had on your wish list (especially if you are looking for new releases).

Apple (NASDAQ: AAPL) offers an a la carte model through iTunes that lets you rent (or buy) the exact video that you want by downloading it.  The selection is far more comprehensive than Netflix's, but the a la carte model can add up quickly.  Renting a new release often costs $4-$5, and many older releases are only available for purchase.  So, watching exactly what you want may result in a pretty hefty bill.  Plus, the devices with built-in ability to watch iTunes videos are typically Apple's iOS devices or computers with iTunes installed; that's not a limiting factor in many households these days, but this can be a limitation for some.  

More recently, Google (NASDAQ: GOOG) has entered the streaming video rental (and sales) arena with its efforts to monetize YouTube with rental and digital sales of movies in a manner that follows Apple's a la carte model.  YouTube presents yet another deep-pocketed competitor in the streaming world, and while YouTube's strategy continues to be developed, this threat can't be underestimated given Google's massive size, the established user base of YouTube, and the wide array of devices with either YouTube apps and/or Android OS.  At the moment, YouTube doesn't offer a content library available for monthly subscription, but that can certainly change given the company's track record for creating value for users.  

Amazon.com has taken the best of both of these models (and more!) and combined them into Amazon Instant Video.  For $79 per year, Prime Instant Video provides unlimited viewing of a library of thousands of titles that is beginning to rival Netflix after the recent deal between Amazon.com and Epix.  If a viewer is set on watching something not in the free content library, they are already just a click away from renting (or buying) the video from Amazon.com's paid Instant Video store, which operates much like Apple's iTunes video store; a recent CNET review concluded that Amazon.com's streaming video "Amazon tends to offer less expensive movie rentals and purchases" than Apple's iTunes.  When combined with a growing list of compatible devices (including iPads and iPhones) that rivals Netflix, Amazon.com has combined the best of both businesses models and then gone a step further as discussed below.

It’s All About Content

Ultimately, the success of streaming video providers is reliant on the content they can provide relative to competition not only in streaming video, but traditional sources of in-home entertainment such as cable and satellite as well as DVD rental and sales channels.  To stay ahead of the competition, each of these companies is seeking to carve out a niche that creates a compelling value proposition for customers based on a specific mix of price and variety of content.  This ecosystem provides content owners with significant power given every distributor's reliance on sought-after titles.  The constraints of $8 per month pricing and finite liquidity have forced Netflix to make some difficult content decisions in the past couple of years. Among them, Netflix has lost content deals with Sony and Disney as well as exclusivity with Epix.   Netflix has strategically augmented its content catalog with more cost effective replacements, but the fact remains that $8 per month only pays for a limited amount of the most in demand content.  

Meanwhile, Amazon.com has used a combination of its financial resources and existing partnerships with content owners to sign deal after deal in recent months.  The most recent deal with Epix brings Prime Instant Video's content catalog to over 30,000 movies and TV episodes according to the company's earnings release last week.  In addition, a viewer that is hoping to watch a specific title that is not on Prime Instant Video is only a click or two away from being able to watch the title at what is often the lowest pay-per-view rate available.  This convenience is just one of several differentiators for Amazon.com's Prime Instant Video.

Let's Not Forget About the Rest of the World

Thus far, this discussion has centered on Amazon.com's Instant Video available in the United States.  Netflix has been aggressively growing its international streaming business, with paying subscribers jumping from less than a million a year ago to 3.7 million as of September 30.  Internationally, Netflix faces significant competition in certain markets, including competition from LoveFilm in Europe.  LoveFilm has over 2 million subscribers and operates a legacy DVD rental and growing streaming subscription business similar to Netflix.  Guess who owns LoveFilm?  Amazon.com. Strategic acquisitions that provide leadership in niche markets is a recurring trend in Amazon.com's history (and this blog series).

Value Proposition and Customer Stickiness

Streaming video is looked at with a drastically different perspective by each of the competitors discussed above.  As primarily a manufacturer of consumer devices, Apple provides a la carte video as an expansion of its iTunes store; this important to Apple both as a revenue generator and key content component for its Mac, Apple TV and iOS ecosystem of devices.  Presently, Google's expansion into paid streaming video appears mostly as an experiment in monetizing YouTube and figuring out ways to satisfy customer demands.  Meanwhile, Netflix is a pure-play streaming video (and DVD rental) company; this product is the only way the company makes money, so it is intensely focused on creating a sound business plan that balances low cost for subscribers and the acquisition of content.  This probably comes as no surprise, but Amazon.com takes a completely different approach.  Prime Instant Video isn't designed to make money.  In fact, it isn't even the reason the vast majority of Prime subscribers sign up for the service; the most popular perk for Prime members is unlimited 2 day shipping on any of 15 million eligible items purchased from Amazon.com.  

So why in the world is Amazon.com essentially giving away a product that is arguably comparable to Netflix's (a recent PC Mag article thinks the services are comparable)?  If you ask Netflix CEO Reed Hastings, he says "It’s really about low-cost shipping, but why is video in there? It’s kind of a confusing mess."  Amazon.com CEO Jeff Bezos clearly thinks about it differently.  For the same reasons that Prime was created in the first place with unlimited 2 day shipping or that Amazon.com jumped into the realm of consumer electronics manufacturing of the Kindle and Kindle Fire, Bezos is constantly looking at ways to attract customers to his empire with the end goal of maximizing revenue.  Amazon.com does not release Prime membership numbers or much detail into its streaming video, but analysts estimate that Prime has at least 10 million subscribers.  That is 10 million people that will look first to Amazon.com's website to buy something online in order to take advantage of the savings and convenience of free 2 day shipping (with no minimum purchase).  Increasingly, those 10 million people will look to Amazon.com's Prime Instant Video to see if they can stream a movie on their iPad, smart TV or any number of other devices; if they can't find it in the free Prime Instant Video library, the next most convenient (and often cheapest) place to look is Amazon.com's paid Instant Video library which is seamlessly integrated into whatever Amazon Instant Video app is being used.  This effect is powerful, and has the potential to generate the type of customer loyalty and stickiness that has made Amazon.com's Kindle a huge force in driving the company's sale of e-books.

Like pet supplies or the other areas that will be the focus of this blog series, Amazon.com doesn't need to be the only (or even largest) player in streaming video in order to have a meaningful impact on the company's tremendous growth plans.  Amazon.com's management believes that this growth will be best achieved through the customer-centric approach that is at the core of Amazon Prime.

The Foolish Bottom Line

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BrewCrewFool owns shares of Amazon.com, Google, Apple, and Netflix. The Motley Fool owns shares of Apple, Amazon.com, Google, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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